Matt Cable, manager of the Rights and Issues Investment Trust, discusses undervalued UK stocks, the pace of M&A activity and reasons to be upbeat about smaller companies.
One of the interesting trends the UK stock market right now is the volume of merger and acquisition activity. Companies including Spectris and Ricardo have received bids recently, with the offer price in both cases considerably higher than the market value of the company.
Two companies we own in the Rights and Issues Investment Trust, Renold and Alpha Group, have been takeover targets, with Renold, a maker of industrial chains and gears, ultimately accepting an offer that valued the shares at a 50% above the market price before the offer.
We think this acquisition activity highlights both the range of high-quality UK businesses and the deeply discounted nature of their shares. Please note that stock examples are for illustrative purposes only and are not a recommendation to buy or sell.
Out of favour
The UK stock market, and smaller company shares in particular, are out of favour with global investors and trade at a considerable discount to other markets and to their historic averages. The Rights & Issues Investment Trust trades at a near 20% discount1 to its Net Asset Value at the time of writing. NAV is the market value of an investment fund’s assets minus its liabilities. The market value is usually determined by the price at which an investor can redeem the shares.
We think that over time these discounts will reverse. In fact, the returns of the UK’s FTSE All Share Index have exceeded those of the US’s S&P 500 index in the first half of this year2. Please note that past performance does not predict future returns.
At the trust, we invest on a medium to long term timeline, which means longer than five years. We focus on smaller companies and look for quality companies with good growth prospects, and we remain patient, allowing these businesses time to demonstrate their potential.
Steady growth
We see reasons to be optimistic about UK markets. The economy is in decent shape, with inflation normalising from a post-Covid peak, interest rates falling and business and consumer confidence improving. The economy is growing at a modest but steady pace.
The UK government has emphasised the importance of economic growth and introduced policies intended to drive expansion. Not all of these will be successful, but we welcome the policy support. The government also has pledged support for capital markets and proposed reforms in areas such as stock market rules, ISAs (savings accounts) and pensions.
No silver bullet
We think the UK can be seen as a relative haven of stability compared with the US, where the Trump Administration is introducing big policy changes, and even parts of Europe where there are political divisions. The Labour government has four years to achieve its plans, and while there’s no silver bullet, we are hopeful of at least some success for its economic policies.
As investors, we are stock pickers who are aware of the macro-economic environment, but focus more on company fundamentals, or the underlying financial data of the business, when choosing which shares to own. We care about a company’s valuation, but we buy stocks only where we see a business has quality and healthy growth prospects.
We prefer companies run by management teams with strong track records and which are mispriced by the market. We are style agnostic, which means the portfolio exhibits both growth and value characteristics. Growth typically refers to companies which grow sales and earnings faster than the market average and whose shares are higher priced. Value typically refers to more established companies whose shares are priced lower.
There are around 20 holdings in the portfolio. The biggest holdings by sector or industry are industrials, followed by financials and consumer discretionary.
The Rights and Issues Investment Trust is managed by me as part of the Jupiter UK small and midcap equities team. Jupiter has expanded its range of UK equity funds in 2024 in a sign of its long-term commitment to this asset class.
Delivering growth
The first half of this year was uniquely challenging, especially around the Trump Administration’s “Liberation Day’’ tariff announcements, which caused volatility in markets. We didn’t try to trade into these swings in the market and didn’t add or remove any whole holdings during that period. We increased the amount of cash on hand, in case we should see compelling buying opportunities.
The UK company managers that we speak to say that while they are mindful of the challenging global economic backdrop, they remain confident in their company’s ability to deliver growth. This also gives us confidence.
We have some fabulous businesses in the UK, both domestic and global companies. We can’t predict the catalyst that will push UK shares back onto the radar of global investors. Certainly, the robust level of takeover activity underscores the quality, value and dynamism of UK Plc, in our view.
We see good opportunities over the medium to long term for the trust and its investors. We aim to achieve the objective of generating returns that exceed the benchmark whilst managing risk.
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The value of investments and income may go down as well as up and you may not get back amounts originally invested. Exchange rate changes may cause the value of investments to fall as well as rise.
Investment companies are traded on the London stock exchange, therefore the ability to buy or sell shares will be dependent on their market price, which may be at a premium or discount to the net asset value of the company.
We recommend you discuss any investment decision with a financial adviser, particularly if you are unsure whether an investment is suitable. Jupiter is unable to provide investment advice.
Risks applicable to investment companies
The investment company tends to invest in fewer companies and may therefore be more volatile than a broadly diversified one. The investment company invests in smaller companies which can exhibit higher volatility under certain market conditions. If larger numbers of sellers suddenly seek to sell a less liquid stock, this can drive down the price further than in the case of a more liquid stock. While the investment company intends to pay a progressive dividend, there is a risk that underlying companies may reduce or cut dividends altogether,
Details of charges and their effect on returns are contained in the most recent published Report and Accounts. Current tax levels and reliefs will depend on individual circumstances and further details can also be obtained from the most recent published Report and Accounts which are available from Jupiter on request.
This article is for information only and nothing herein is to be construed as a solicitation or an offer to buy or sell any financial products.
Issued by Jupiter Unit Trust Managers Limited and Jupiter Asset Management Limited which are both authorised and regulated by the Financial Conduct Authority and their registered address is The Zig Zag Building, 70 Victoria Street, London SW1E 6SQ
[1] Source: Bloomberg, as at 30.6.25
[2] Source: Bloomberg, as at 30.6.25